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India Losing Lure as Offshore R&D Hub

Some companies saw 20% cost increase in running R&D centers in 2007.

By Anil Penna, Agence France-Presse | Feb 20, 2008

India used to be seen as the perfect offshore research and development hub for global firms seeking to tap its low-cost and supposedly vast engineering talent pool to devise products for world markets. Companies such as IBM, Intel, AMD, Motorola, Cisco and Siemens have opened R&D centers in India, drawn by payroll costs that were once a quarter of those in the U.S. and Europe.

But the cost advantage is fading and engineers trained in basic research are harder to find, reducing India's appeal, says Zinnov, a consulting firm that advises overseas firms on R&D issues. "Some companies witnessed a 20% rise last year in the cost of running their R&D operations in India," Zinnov chief executive Pari Natarajan said."If this trend continues, the cost advantage of doing R&D in India compared to the U.S. will go away," he said, predicting a shakeout in the R& D offshoring market.

India is home to 594 R&D facilities set up by overseas firms that invested a combined $5.83 billion, according to Zinnov. R&D centers whose expenses are incurred mainly in rupees were hurt by a more than 12% rise last year in the value of the Indian unit against the dollar. And wages jumped about 15% as companies fought to hire and retain hard-to-find engineers skilled in research.

India turns out more than half a million engineers every year, but institutions do not train them in basic research, limiting the available talent pool to no more than 100,000 people, said Natarajan. The shortage may set back the ambitious expansion plans announced by companies such as networking giant Cisco, which said in October that it plans to triple its headcount in India to 10,000 in three years. "It's going to be very difficult for companies which have very aggressive hiring targets," Natarajan said. "It's almost impossible to hire unless you compromise on the quality of talent."

Cisco, which plans to use India to develop products for customers in emerging markets, has opened 170 academies across the country and is training 8,600 students to overcome the talent crunch, human resources executive Leo Scrivener said. "We are aware that a large pool of technical specialists and business solutions experts can't be readily hired from the market," Scrivener said.

Cisco has benefited from its R&D facility in India that has generated 110 U.S. patents, with another 400 pending with the U.S. Patents and Trademark Office.

Hundreds of patents have been filed by other research facilities based in the country. Half the work on an Intel wonder chip, a fingernail-sized device unveiled last year that offers supercomputer performance, was done by its India research centre.

Despite the problems facing R&D, Zinnov predicts that investment in existing facilities by large global companies capable of riding out rising costs, and with the infrastructure to train fresh graduates, will drive India as an offshore R&D destination. That will pump up the R&D market by an annual average of 23% until 2012, even as per-employee cost in India increases by a yearly 13.3%.

Smaller facilities may have to shut shop or sell out while investment in new R&D centers will likely dry up as part of a looming consolidation, said Natarajan.